Analysis Fed’s latest Balance sheet to determine Quantitative Tightening by Fed

While the programme of Quantitative Tightening by FED has started wherein $47.50 billion of QT will happen each month starting from June to August 2022 wherein $30Billion per month will be from Treasury Securities and $17.50 billion per month will be from Agency Debt and Agency Mortgage Backed Securities. Though size of this QT is small considering the Balance sheet size of Fed but we want to see the execution of this QT in order to provide some realistic picture. In this Blog we will analyse the Balance sheet reduction programme of Fed with some statistics and will review whether actual Balance sheet reduction has happened or not.

On 7th July 2022 Fed has uploaded its weekly Statistical release of “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks”

Let is present abstract “Factors affecting Reserve Balances of Depository Institutions” :

Source:Fed

From the above figure, reduction of $11.234 billion in Mortgage Backed Securities have been noticed from 29th June 2022 till 6th July 2022.

In case of Notes and Bonds, holdings have been reduced by 22.12 Billion. However, Notes and Bonds Inflation Indexed  (TIPS, etc) & Inflation Compensation have been increased by $2.374 Billion. Overall reduction has been $19.746 Billion.

Further, reduction of $3.025 Billion  has been done in loans portion representing Primary Credit, Secondary Credit and Paycheck Protection Programme Liquidity facility.

Overall in a week’s time, the reduction in Reserve Bank credit is of $34.340 Billion but as MBS and Treasury reduction was $30.98 Billion. Still 22 days are left in month and Fed needs to compensate the previous month gap where they increased MBS and Treasury portion. Overall they need to do further QT of $60.66 Billion this month.

Lets us see the upcoming Maturities of Treasuries and MBS:

Source:Fed

From above, it is visible that $82.799 Billion dollars of US treasuries are maturing and no Mortgage Backed Securities is maturing. Now all in all, will Fed auction $6.26 Billion for current month and $17.50 billion for previous month gap? Its sceptical and FAQ of Fed doesn’t give any answer to this question.

All in all, how MBS market will react with Fed Auctioning?It will be interesting to watch MBS securities.

Conclusion

The system has so much leverage that the people are always expecting 180 degree turn from Fed. However, the period of 1929 to 1932 where Fed remained silent and nearly 2/3rd of Banks got vanished from the system should also be taken into account. With high probabilities of Rate hike in upcoming 3 months and drainage of liquidity, the condition of global currency market seems to be very critical as various countries are addicted to bazooka of liquidity as flow of credit was readily available in the system. Now with QT of Fed, things have completely changed in system which has resulted in currency volatility spikes. The chase for Dollar globally has begun and all central Banks are hiking interest rates in order to safeguard the currency outflow. The Banks which are late will be the maximum sufferers and Eurozone is at the top of the list where ECB is silently sleeping and watching the game from outside.

Be prepared for the rapid chase of dollar in the system as the situations are critical and external threats are many.

From CA Nishant Maheshwari and Vishal Vora

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